In fact, even as inflation has returned to normal, the U.S. economy has boomed more strongly than forecasters predicted before the pandemic: This isn�

Thinking about "temporary hardship" - by Noah Smith

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2024-10-31 11:30:18

In fact, even as inflation has returned to normal, the U.S. economy has boomed more strongly than forecasters predicted before the pandemic:

This isn’t just due to consumption; in fact, U.S. productivity growth has surged ahead, far outpacing the trend of the Trump and Obama years:

And of course, the U.S. has strongly outperformed all other rich economies since the pandemic (and probably outperformed China as well).

Yay America! Except there is one possible fly in the ointment. This stellar performance has come with high levels of government borrowing. Deficits have come down since the end of pandemic relief spending, but remain far higher than usual, at 6.1% of GDP in 2023:

Unless you believe very strongly in Ricardian Equivalence or some other theory that says deficits don’t boost the economy, you should probably give these high deficits at least a bit of the credit for the economic boom. Just how much credit is hard to say — we know that fiscal multipliers are lower in booms than in busts, so the big deficit is probably not that huge of a factor. But it’s probably doing something.

Anyway, this deficit has to go down. Interest costs are beginning to eat up more and more of the government’s budget every month. Rates are going down, but given underlying inflationary pressures (low debt levels, decoupling, tariffs, high employment, etc.), it’s unlikely that rates will go back to the ~0% of the 2010s. ZIRP was a special era, and barring another major crisis, it probably won’t return anytime soon.